Sallie Drops Lawsuit

The student lender gets new, $31 million line of credit to replace funding in failed buyout deal.

Sallie Mae ( SLM) on Monday said it was dropping its lawsuit over a failed $25 billion buyout deal, as two of the participants in the scuttled transaction teamed with other banks to extend $31 billion in credit to the student lender.

Bank of America ( BAC) and JPMorgan Chase ( JPM), who were part of a consortium led by private-equity firm J.C. Flowers & Co., led a group of its peers in extending $31 billion in credit good for up to a year.

The funding replaces $30 billion in interim financing the banks would have put in place under the failed deal. Barclays ( BCS), Deutche Bank ( DB), Credit Suisse ( CS), Royal Bank of Scotland ( RBS) and UBS ( UBS) also teamed in the effort.

Sallie Mae has struggled in recent months amid the lingering credit crunch. The lender last week reported a $1.6 billion fourth-quarter loss, due largely to rising loan-loss provisions. During a conference call discussing the results, CEO Albert Lord apologized for using profanity during a contentious December call with analysts.

As part of the new deal, Sallie agreed to drop its lawsuit against Flowers, which was fighting the possibility of having to pay a $900 million break-up fee. The firm was arguing that the lender had suffered a "material adverse change" to its business due to the credit crisis and a change in federal student loan laws that slashed billions of dollars in federal subsidies for the school loan industry.

Sallie shares were up fractionally to $20 in recent trading Monday morning.